UK Government s Public Finance Plans and Fiscal Targets

Transcription

1 UK Government s Public Finance Plans and Fiscal Targets Scottish Government June 2015 Overview This paper analyses the scope to make different choices about the UK s public finances, within the fiscal targets set out in the Charter for Budget Responsibility. The key points are: The programme of fiscal consolidation since 2010, aimed at reducing public sector borrowing, has led to significant cuts in public spending, including to welfare. The spending plans set out in the March 2015 Budget suggest further spending reductions will continue during the current parliament. The Scottish Government advocates an alternative approach aimed at balancing deficit reduction with increasing investment in public services. The Scottish Government s proposal is to increase spending on public services by 0.5% a year in real terms between and This would release over 140 billion during this period for investment in UK public services compared to the March Budget plans - while ensuring that public sector debt and borrowing fall over the current UK parliament. Such an approach would provide up to 11 billion of additional investment for Scotland over the next four years. The Scottish Government continues to believe that a moderate increase in public spending, as outlined above, strikes the most appropriate balance between investing in public services and ensuring the sustainability of the public finances. The UK Government has advocated an alternative approach which will result in further spending cuts in the coming years to achieve the fiscal targets set out in the Charter for Budget Responsibility. However, the scale of the spending cuts set out in the March 2015 Budget significantly exceeds what is required to meet the UK Government s own fiscal targets. There is therefore flexibility for the UK Government to meet its fiscal objectives without implementing in full the spending cuts that are currently planned for the coming years. For example, it could choose to increase investment in public services above March Budget levels by 8 billion in and up to 36 billion in , within the fiscal targets in the Charter for Budget Responsibility. In total, such a scenario would permit an additional cumulative 93 billion of investment in public services over the next four years compared to March Budget plans. This could provide up to 7 billion in additional investment in devolved public spending in Scotland over the same period. 1

2 billion ( prices) Recent Trends in UK Public Spending The programme of fiscal consolidation since 2010, aimed at reducing public sector borrowing, has led to significant cuts in public spending, including on welfare. For example, in the current financial year ( ) the Scottish Government s fiscal DEL budget is around 2.5 billion lower in real terms than it was in when the UK Government s fiscal consolidation programme commenced. Reductions in Scottish Government Fiscal DEL budget compared to (real terms) It has been argued that the UK Government s approach to deficit reduction has undermined the economic recovery in the UK, and in turn made it more challenging to achieve its fiscal targets. 1 For example, by depressing aggregate demand after 2010 at a time when private sector output had still not recovered from the recession, the speed and scale of the UK Government s austerity programme arguably contributed to the UK having a slower recovery than many of its international peers. Indeed, even by the end of 2014, five years after the end of the recession, UK GDP per head remained below the pre-crisis level. The subdued nature of the UK recovery has meant that growth in tax receipts has been slower than the UK Government anticipated when it set out its fiscal consolidation plans in As a result, over the six years to March 2016, the UK Government is due to overshoot the borrowing plans that it set out in June 2010 by over 150 billion. Planned UK Public Spending The Chancellor has signalled that treating public spending reductions as the focus of substantial further fiscal consolidation will continue during the current parliament. The March 2015 UK Budget set out aggregate spending plans for to which imply significant further real terms reduction in spending on public services, particularly in and The Office for Budget Responsibility reports that planned reductions in and will be larger than those implemented in any single year of the Coalition Government. The scale of these cuts means that, when complete, government consumption, a measure of spending on day to day public services, will have fallen to its lowest level since 1964 as a share of GDP. 1 See for example, Paul Krugman s article from 29 th April: 2

3 billion ( prices) The Institute for Fiscal Studies (IFS) published analysis in April of the spending plans contained in the March 2015 UK Budget and the fiscal proposals contained in the Conservative party manifesto to estimate the outlook for spending on public services (Departmental Expenditure Limits). 2 The IFS analysis suggested that in real terms spending on public services will fall by 2.6% in , followed by cuts of 2.6% in and 1.5% in Spending is then projected to grow in real terms during The impact of such cuts on the Scottish Government s budget will depend on how any spending cuts were allocated across UK Government departments and the subsequent application of the Barnett Formula. As an illustrative example, if the cut to the Scottish Government budget was in proportion to its share of overall UK departmental spending, it could expect to see its budget cut by up to 2 billion (6.2%) in real terms between and The scale of planned cuts is expected to be confirmed at the supplementary UK Budget on the 8 th July. The UK Government also announced, on the 4 th June, changes to spending settlements in the current financial year. These will reduce Whitehall departments budgets by 3 billion in Through the operation of the Barnet formula, these measures will impose further cuts on the Scottish Government s budget. The Scottish Government has already taken measures to minimise the impact of the UK Government s fiscal consolidation programme in the current financial year, including the use of capital borrowing powers of around 300 million and its programme of revenuefinanced infrastructure investment, which will deliver estimated investment of around 950 million next year. Scottish Ministers have been clear that given the Scottish Government s budget for has been agreed by the Scottish Parliament, the proposed cuts should not go ahead and there must be no in year cuts to the Scottish budget this year. Illustrative Outlook for Scottish Government Spending IFS analysis is available from 3 Figures to are consistent with Scottish Government budgets as of March 2015 Budget. Figures for subsequent years assume that 8% of the year on year change in the UK Government s total DEL budget is applied to the Scottish budget. Total UK DEL figures are taken from 3

4 billion ( prices) Scottish Government Proposals The Scottish Government advocates an alternative approach to public spending which would balance the need to reduce the deficit with ensuring that there are no further cuts to spending on public services. The Scottish Government s proposal is for an increase in spending on public services of 0.5% a year in real terms between and Such an approach would provide over 140 billion in cumulative additional investment in UK public services over this period, including up to 11 billion of additional spending on devolved public services in Scotland compared to the plans announced at the March UK Budget, whilst still ensuring that public sector debt and borrowing fall over the current UK parliament. The Scottish Government continues to believe that this approach provides the best balance between ensuring the sustainability of the UK public finances, and investing in the public services which are vital to supporting households and long term economic growth. Scottish Government s proposed increases in UK public spending compared to March Budget plans The UK Government s Fiscal Targets The UK Government s proposed approach for further reductions in public spending, as set out in the March 2015 Budget, significantly exceed what is required to meet the UK Government s own targets for reducing debt and the deficit set out in the Charter for Budget Responsibility. The UK Government therefore has flexibility, within these targets, to ease the scale of the spending cuts it has planned. The Charter for Budget Responsibility sets out two key fiscal targets: The Deficit Target - to achieve cyclically adjusted current balance by the end of the third year of the rolling, 5 year forecast period and; The Supplementary Target for public sector net debt as a percentage of GDP to be falling in

5 % of GDP billions (negative denotes surplus) To meet these targets when the next UK Budget is published on 8 th July, the UK Government must set out plans consistent with achieving a cyclically adjusted current balance in (the third year of the forecast period) and having debt falling as a share of GDP in This will require further tax rises and / or spending cuts compared to Based on plans set out in the March 2015 Budget, public sector net debt is projected to begin falling as a share of GDP in (one year earlier than the supplementary target requires) and a cyclically adjusted current budget surplus of 35 billion is projected by , rather than returning the cyclically adjusted current budget to balance. The UK Government therefore has the flexibility to cut spending by less than currently planned whilst still meeting its fiscal targets. This is demonstrated in the charts below. The blue lines indicate the path of public sector net debt and the cyclically adjusted current budget deficit based on the UK Government s Budget 2015 plans. The red lines set out an alternative fiscal path which would be compatible with meeting the UK Government s fiscal targets set out in the Charter for Budget Responsibility, while maximising resources available to public services. 82% 80% 78% 76% 74% 72% 70% 68% 66% UK Public Sector Net Debt UK Cyclically-adjusted deficit on current budget UK Government Alternative scenario UK Government Alternative scenario Source: OBR Economic and Fiscal Outlook (March 2015) and Scottish Government analysis Adopting the alternative approach implied by these charts would mitigate further reductions in public services while still meeting the UK Government s fiscal mandate. Additional investment could range from 8 billion in up to 36 billion in , as summarised in the table below. With UK gilt yields remaining close to their historical lows, such an approach would allow investment in public services and infrastructure whilst minimising future repayment costs. In total, such an approach would provide an additional 93 billion in investment in public services over the next four years as a whole compared to the March Budget plans. This could provide up to 7 billion in additional investment in devolved public spending in Scotland over the same period. 5

6 Potential additional spending on public services consistent with meeting the Charter for Budget Responsibility Targets ( bn) Additional spending UK Additional spending Scotland (Pro rata share) Within this overall approach, the UK Government would be able to exercise choices about revised spending plans, for example investment in the economy and infrastructure, bringing forward increases in health spending, social security, supporting low incomes through tax changes and increases in the working allowance. These choices are important but are outside the scope of this paper. Conclusion The UK Government has set out plans for further reductions in public spending in the coming years. The Scottish Government advocates an alternative approach aimed at balancing deficit reduction with increasing investment in public services. This would, release over 140 billion between and for investment in UK public services compared to the UK Government s March Budget plans whilst safeguarding the sustainability of the UK public sector finances. Even if the UK Government remains committed to meeting its fiscal targets for debt and the deficit, it has flexibility to ease the scale of planned spending cuts. The analysis presented in this paper demonstrates that it could choose to increase cumulative investment in public services by 93 billion over the next four years compared to March Budget plans whilst still meeting its fiscal targets 4 Note this table shows potential additional spending available for public services, after taking into account the impact on public sector debt interest 6

EAST AYRSHIRE COUNCIL CABINET 21 OCTOBER 2009 TREASURY MANAGEMENT ANNUAL REPORT FOR 2008/2009 AND UPDATE ON 2009/10 STRATEGY Report by Executive Head of Finance and Asset Management 1 PURPOSE OF REPORT

NHS and social care funding: the outlook to 2021/22 Research report Rowena Crawford and Carl Emmerson July 2012 About this work programme This work, undertaken by the Institute for Fiscal Studies (IFS),

Fiscal Responsibility in the UK Stephen Nickell Nuffield College, Oxford Member of the UK Budget Responsibility Committee Credibility If the credibility of a government s fiscal plans is weak, interest

Economic and fiscal outlook July 2015 Cm 9088 Office for Budget Responsibility: Economic and fiscal outlook Presented to Parliament by the Economic Secretary to the Treasury by Command of Her Majesty July

Appendix C Accountant in Bankruptcy Annual report on the 2013/14 audit Prepared for Accountant in Bankruptcy and the Auditor General for Scotland 6 August 2014 Audit Scotland is a statutory body set up

1. Summary Chapter 2: The public finances under Labour The evolution of the public finances since 1997 mirrors the first 12 years of Conservative governments after 1979: three years of impressive fiscal

PUBLIC SERVICES ELECTION General Election Manifesto 2015 Page 2 This Election Matters The vast majority of UNISON Scotland s members work in areas which are devolved to the Scottish Parliament, but even

London Borough of Camden Wider Economic Environment and Medium-term Financial s 10 th July 2015 Summary of the Report: This report provides an update on the government deficit reduction programme and the

The Outlook for Higher Education Spending by the Department for Business, Innovation and Skills IFS Report R86 Claire Crawford Rowena Crawford Wenchao Jin The Outlook for Higher Education Spending by the

ANNEX 1 - MACROECONOMIC IMPLICATIONS FOR ITALY OF ACHIEVING COMPLIANCE WITH THE DEBT RULE UNDER TWO DIFFERENT SCENARIOS The aim of this note is first to illustrate the impact of a fiscal adjustment aimed

Scenarios for the Welsh Government Budget to 2025-26 IFS Report R83 Benjamin Deaner David Phillips Scenarios for the Welsh Government Budget to 2025 26 1 Benjamin Deaner David Phillips Copy-edited by Emma

Research and Information Service 13 th May 2011 Eoin Murphy Current and Proposed Higher Education Student Finance Arrangements in the UK Regions NIAR 435-2010 This paper examines the existing Higher Education

Scottish Independence Charting the implications of demographic change Ben Franklin I May 2014 I www.ilc.org.uk Summary By 2037 Scotland s working age population is expected to be 3.5% than it was in 2013

UK Economic Forecast Q1 2015 David Kern, Chief Economist at the BCC The main purpose of the BCC Economic Forecast is to articulate a BCC view on economic topics that are relevant to our members, and to

STABILITY PROGRAMME 2014-2017 COUNCIL OF MINISTERS APRIL 30 2014 Stability Programme 2014-2017 The Council of Ministers has approved today the referral to Brussels of: The Stability Programme 2014-2017,

Overall Position for 2012 Income and Expenditure SUMMARY OF FINANCIAL REPORT AND ACCOUNTS 2012 The States ended the year in a good position, with higher income than budgeted, and lower expenditure than

UK debt and the Scotland independence referendum The transfer of debt 1.1 In the event of Scottish independence from the United Kingdom (UK), the continuing UK Government would in all circumstances honour

UK Economic Forecast Q3 2014 David Kern, Chief Economist at the BCC The main purpose of the BCC Economic Forecast is to articulate a BCC view on economic topics that are relevant to our members, and to

NHS funding and expenditure Standard Note: SN/SG/ Last updated: April Author: Rachael Harker, Social and General Statistics Expenditure on the NHS has risen rapidly and consistently since it was established

Controlling Public Spending: An International Perspective Ross Campbell Deputy Director Government Financial Reporting Overview: International overview The UK position and the role of HM Treasury The UK

1. Public finances: the long road ahead Rowena Crawford, Carl Emmerson and Soumaya Keynes (IFS) Summary The financial crisis and associated recession led to a significant deterioration in the outlook for

2. COUNTRY NOTES: GREECE 119 1. Economic situation The Greek economy is in a recession in the wake of the economic and sovereign debt crisis, exacerbated by the impact that austerity measures are having

MEDIUM TERM FINANCIAL STRATEGY 2016/17 TO 2020/21 (Version produced in October 2015) MEDIUM TERM FINANCIAL STRATEGY EXECUTIVE SUMMARY Introduction This summary sets out the key issues arising from Shepway

1 Supplemental Unit 5: Fiscal Policy and Budget Deficits Fiscal and monetary policies are the two major tools available to policy makers to alter total demand, output, and employment. This feature will

Government spending on public services in Scotland: current patterns and future issues IFS Briefing Note BN140 Ben Deaner David Phillips Government spending on public services in Scotland: current patterns

MEASURING GDP AND ECONOMIC GROWTH CHAPTER Objectives After studying this chapter, you will able to Define GDP and use the circular flow model to explain why GDP equals aggregate expenditure and aggregate

The UK s public finances in the long run: the IFS model IFS Working Paper W13/29 Michael Amior Rowena Crawford Gemma Tetlow The UK s public finances in the long-run: the IFS model Michael Amior, Rowena

AUTUMN STATEMENT 2014 Cm 8961 December 2014 AUTUMN STATEMENT 2014 Presented to Parliament by the Chancellor of the Exchequer by Command of Her Majesty December 2014 Cm 8961 Crown copyright 2014 You may

Student Funding Panel An analysis of the design, impact and options for reform of the student fees and loans system in England Contents Foreword 1 Executive summary 3 Introduction 3 The funding context

How should we assess the implications of a rise in bond yields for UK pension schemes? Executive Summary In common with other, core sovereign bond markets, gilt yields are extraordinarily low by comparison

The IMF believes that Latvia will be able to pay back the loan The International Monetary Fund (IMF) has not started any particular talks with Latvia about the repayment of the international loan, which

EUROPEAN COMMISSION Brussels, 15.11.2013 SWD(2013) 606 final COMMISSION STAFF WORKING DOCUMENT Analysis of the draft budgetary plan of ITALY Accompanying the document COMMISSION OPINION on the draft budgetary

Response on the financing of Employment Insurance and recent measures Ottawa, Canada October 9, 20 www.pbo-dpb.gc.ca The mandate of the Parliamentary Budget Officer (PBO) is to provide independent analysis

Foreword from the Deputy Chief Executive Wigan Council is one of the largest local authorities in the country with a population in excess of 300,000, more than 140,000 residential properties and a yearly

Trends in Foreign Direct Investment Inflows This article briefly examines recent trends in foreign direct investment in Australia, both in the context of the longer-term perspective and relative to the

House of Commons Treasury Committee June 2010 Budget: Government Response to the First Report from the Committee First Special Report of Session 2010 11 Ordered by the House of Commons to be printed 11

Scotland in the United Kingdom: An enduring settlement January 2015 Scotland in the United Kingdom: An enduring settlement Presented to Parliament by the Secretary of State for Scotland by Command of Her

Budget forecast June 2010 C The C.1 interim Office for Budget Responsibility s (OBR) Terms of Reference (TOR) require it to produce a forecast at the Budget, incorporating the impact of policy measures

Comparison of Government Expenditure and Revenue statistics in the monthly Public Sector Finances and quarterly National Accounts 1. Summary This article explains the changes that ONS will be making to

The Living Wage and the Impact of the July 2015 Budget Communities Analytical Services, October 2015 October 2015 THE LIVING WAGE AND THE IMPACT OF THE JULY 2015 BUDGET COMMUNITIES ANALYTICAL SERVICES,

SUMMARY OF FINANCIAL REPORT AND ACCOUNTS 2013 1 Overall Position for 2013 Income and Expenditure The States ended the year in a good position. Whilst income was lower than budgeted, expenditure was also

Filling the Hole: How do the Three Main UK Parties Plan to Repair the Public Finances? 2010 Election Briefing Note No. 12 (IFS BN99) Robert Chote Rowena Crawford Carl Emmerson Gemma Tetlow Series editors:

SPERI British Political Economy Brief No. 10 Public and private sector employment across the UK since the financial crisis. 1 In this Brief, the Sheffield Political Economy Research Institute (SPERI) considers

Project LINK Meeting New York, - October 1 Country Report: Australia Prepared by Peter Brain: National Institute of Economic and Industry Research, and Duncan Ironmonger: Department of Economics, University

HM Treasury contacts This document can be downloaded from www.gov.uk If you require this information in another language, format or have general enquiries about HM Treasury and its work, contact: Correspondence

Public Expenditure Statistical Analyses 2013 Cm 8663 July 2013 Public Expenditure Statistical Analyses 2013 Presented to Parliament by the Chief Secretary to the Treasury by Command of Her Majesty July

SPENDING REVIEW 2010 Cm 7942 October 2010 SPENDING REVIEW 2010 Presented to Parliament by the Chancellor of the Exchequer by Command of Her Majesty October 2010 Cm 7942 45.00 Crown Copyright 2010 You may

CPPR Briefing Note (embargoed til 00.01 15th April 2014) Fiscal implications for an independent Scotland when assuming that it takes on a low, or zero, share of the UK s existing debt Introduction In the

Appendix 5 Oadby and Wigston Borough Council: HRA self-financing business plan model As we enter the final quarter of 2013/14, the HRA business plan model has been updated to reflect activity in 2013/14

Fiscal Policy chapter: 28 13 ECONOMICS MACROECONOMICS 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to

EAST AYRSHIRE COUNCIL CABINET 24 SEPTEMBER 2014 ANNUAL TREASURY MANAGEMENT REPORT 2013/14 Report by Executive Director of Finance and Corporate Support 1. PURPOSE 2. To provide Cabinet with a summary of

Economic impacts of expanding the National Insurance Contributions holiday scheme Federation of Small Businesses policy paper Overview This research paper sets out estimates for the economic and employment

106 FISCAL OUTLOOK FOR FINANCIAL YEAR 2013 2 FiScAl outlook FoR FiNANciAl YEAR 2013 2.1 Budget for FY2013 A basic surplus of $0.3 billion (or 0.1% of GDP) is expected for FY2013. After factoring in Topups

Estonia and the European Debt Crisis Juhan Parts Estonia has had a quick recovery from the recent recession and its economy is in better shape than before the crisis. It is now much leaner and significantly

1 Module C: Fiscal Policy and Budget Deficits Note: This feature provides supplementary analysis for the material in Part 3 of Common Sense Economics. Fiscal and monetary policies are the two major tools